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March 30, 2012

Retirees Boost Their Financial Risk With Gold

If generating income is their primary financial goal, why are they overleveraged in non-income producing assets?

Gold bugs are fretting. Although gold (GLD) has been up for 11 consecutive years, 2012 has been a bumpy ride.

Since the beginning of the year, gold has recorded a gain of around 6.11%, which is less than the S&P 500’s (SPY) surge of 12.20%. Likewise, the beloved yellow metal is even underperforming broader precious-metals exchange-traded products, which include sliver (SIVR), and platinum (PPLT).

From a technical angle, gold now trades below both its 50 and 200 simple day moving average, which in Star Trek talk basically means to abandon ship. Is the bull market in gold over?

“Lost Decade” and Beyond

The 2000-10 performance for the S&P 500 has been called the “lost decade.” because buy-and-hold investors of this particular stock index fared worse than bonds (AGG) along with other major asset classes like gold (IAU).

Investors that owned dividend-focused stock ETFs, like the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) or emerging market stocks (VWO) did much better than S&P 500 investors. Going back to 2000, a dividend stock strategy experienced average gains of almost 8%.

Gold bullion began the year 2000 at $318.70 per ounce and closed 348% higher at $1,421.40 per ounce at the end of 2010. However amazing that gold’s bullish run has been, it still doesn’t solve one of gold’s biggest shortcomings; it produces no income.

What Gold Doesn’t Do

A shortage of retirement income is one of the biggest predicaments facing Baby Boomers. The Center for Retirement Research at Boston College pegs it as a $6.6 trillion conundrum. The Center’s analysis included major sources of retirement income like Social Security, traditional pension plans, personal savings, and 401(k) retirement plans.

What have investors been doing to fix this? Instead of tackling this $6.6 trillion problem head-on, too many retirees have been making the fundamental mistake of concentrating their investments in gold – an asset that produces zero income.

Observant financial advisors should be quick to point out this predicament to retirees who have converted to the goldbug religion. If generating income is their primary financial goal, why are they overleveraged in non-income producing assets like gold?

The Federal Reserve Bank’s distorted monetary policies over the past several years have had a perverse effect upon the investing public. Sadly, it has induced many investors to take more risk with their capital than they know.

Although gold is often sold as a “safe haven” trade, that argument begins to vanish when gold prices sink.

The fact is any substantial decrease in gold prices will undoubtedly massacre these unsuspecting folks. And while they wait for gold prices to recover, they’ll get nothing in exchange for waiting. At least S&P 500 investors got dividends during the “lost decade!”

For anyone that doesn’t think a decline in gold prices is problematic, tell that to the people who bought gold at $834 per ounce in 1980 and sat on dead money over the next 27 years.